Chemung Financial Corporation (NASDAQ: CHMG) — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; balance-sheet comparisons are to December 31, 2019. The company provides community banking, lending, wealth management and related financial services, primarily through Chemung Canal Trust Company. Amounts below are in millions unless stated otherwise.
Financial results and condition
- Profitability: Net income was $2.49 million, down 44.2% from $4.47 million a year earlier. Diluted EPS was $0.51 versus $0.92. Return on average assets was 0.55% and return on average equity was 5.32%.
- Revenue and margins: Net interest income declined 0.7% to $15.06 million; non-interest income fell 4.0% to $4.73 million. Fully taxable-equivalent net interest margin was 3.55%, down from 3.71%. The adjusted efficiency ratio increased to 68.50% from 66.04%.
- Credit costs: Provision for loan losses rose to $3.05 million from $1.09 million. The allowance was $26.23 million, or 1.99% of loans, compared with $23.48 million, or 1.79%, at year-end. Net charge-offs were $0.29 million, similar to the prior-year quarter.
- Loans and asset quality: Loans, net of deferred fees and before allowance, grew 0.9% to $1.320 billion. Non-performing loans were $17.95 million, or 1.36% of loans; non-performing assets were $18.33 million, or 1.00% of assets. These ratios improved slightly from year-end.
- Cash flow and liquidity: Operating cash flow was $6.29 million; investing activities used $18.81 million and financing activities provided $35.07 million. Cash and cash equivalents increased to $144.46 million. Management described liquidity as strong; available liquidity included $102.0 million of unpledged available-for-sale securities, $137.0 million of unused FHLBNY capacity and $68.0 million of available unsecured lines.
- Funding, debt and capital: Deposits increased 2.3% to $1.608 billion. Borrowings and other debt were approximately $4.0 million, primarily finance lease obligations. Shareholders’ equity was $190.45 million; the Bank reported a 13.13% total risk-based capital ratio and was categorized as well capitalized. The company declared a $0.26 per-share dividend.
- Other reported measures: Total assets increased 3.0% to $1.841 billion. Comprehensive income was $8.21 million, including $5.70 million of after-tax other comprehensive income, largely reflecting higher fair value of available-for-sale securities.
Material changes versus the prior comparable period
- Net income fell $1.98 million, primarily because the loan-loss provision increased, non-interest expenses rose 1.9%, and non-interest income declined; lower income tax expense partly offset these factors.
- Net interest margin contracted 16 basis points year over year as yields on interest-earning assets fell more than funding costs. Lower deposit interest expense partly offset lower interest income.
- Management attributed $2.7 million of the higher loan-loss provision to revised loss estimates reflecting the economic environment and COVID-19.
- Equity increased from year-end, supported by earnings and the improvement in accumulated other comprehensive loss associated mainly with securities valuations.
Outlook, management commentary, risks and unusual items
- COVID-19: Management said the pandemic’s full effects were uncertain and expected impacts on financial results and demand to continue into Q2 and potentially beyond. Highly impacted industries represented $199.4 million, or 22.3%, of the Bank’s commercial loan portfolio.
- Borrower relief and PPP: By March 31, the company had modified 444 commercial and consumer loans totaling $56.6 million under CARES Act relief. By April 30, it reported deferrals for 170 commercial borrowers with $281.3 million in balances and 806 retail borrowers with $36.3 million in balances. It had submitted 405 PPP applications approved for $145.4 million; a further 590 applications totaling $36.0 million had been submitted by April 30. These later figures are subsequent-period disclosures, not Q1 balances.
- Key risks: Management cited potential deterioration in borrower repayment, collateral values and loan quality; additional provisions; lower net interest margin in a near-zero-rate environment; reduced wealth-management revenue amid market volatility; and operational, cybersecurity and vendor risks. No formal earnings or financial guidance was provided.
- Legal matter: The Bank sued Pioneer Bank over a $4.2 million participation in a commercial credit facility whose borrower defaulted following alleged fraud. Pioneer paid $461,309 on April 23; the filing describes the payment as immaterial and does not state that the dispute was fully resolved.
- Capital actions: A new authorization permits repurchase of up to 250,000 shares; 3,252 shares were repurchased in Q1. A shelf registration effective May 7 permits offerings of up to $50 million in specified securities.
- Accounting and goodwill: The company deferred CECL adoption until January 1, 2023 and anticipates adoption will increase its allowance. An interim goodwill impairment test prompted by COVID-19 resulted in no impairment charge.
Important facts for investors to verify
- Whether COVID-related deferrals, PPP lending and exposure to highly impacted industries lead to increased delinquencies, losses or allowance needs.
- How net interest margin and earnings respond to lower rates, deposit pricing and changes in loan and deposit balances.
- Subsequent-quarter liquidity, PPP funding and forgiveness activity, and the scale and terms of any use of available funding capacity.
- The status and ultimate recovery from the Pioneer Bank litigation and related commercial credit exposure.
- Whether the company issues securities under the $50 million shelf registration or continues share repurchases and dividends at current levels.